Trading Currencies And Investing In Bonds
As many of you know, I’ve been trading currencies in the Forex market for years. I’ve made a career out of pairing the euro with the dollar, the Japanese yen with the euro, and the Swiss franc with the euro - among other currency pairs.
But even though I’m a traditional Forex trader and I’m constantly checking the bid and ask prices for my favorite currency pairs, I’m still always looking for other currency opportunities around the globe - even the more obscure, “unsung” currency plays.
Take foreign bonds for instance. Investors, even American investors have been able to buy foreign bonds for decades. Yet, few foreign bond investors really think of themselves as “currency investors.” The reason? They don’t realize a foreign bond is also a “currency play” too.
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“Trading Currencies” Involves So
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The irony of all this? Foreign bonds are actually one of the most intriguing currency plays in the market today.
If you choose the right one, you can actually profit in three different ways…from capital gains (assuming you buy a bond below par), yield, and currency appreciation if the dollar drops against the currency your bond is denominated in.
In that way, this “unsung” currency play is actually a profit trifecta…if you can choose the right one. Let me explain…
Why the Currency Matters…
When you are investing in a foreign bond, you not only need to have an opinion about what that bond will do but also an opinion about how that country’s currency will fare against your own. That’s where the currency play kicks in.
For instance, if a foreign bond earned 8% interest…that sounds great, right? However, what if I told you, while you were invested in the bond, your currency strengthened 10% against that foreign bond’s currency? Then is it such a good idea?
Gain 8% but lose 10% when you go to convert the money back into your home currency…hmmmm, doesn’t sound like such a good deal to me.
However, what if I told you that a foreign bond earned 5% but your home currency weakened against the foreign bond’s currency by 7%? Now, by the time you take your 5% gains and convert them back into your home currency, you end up with 12% more money than you had before! Now, we’re talking!
By Chuck Butler - www.worldcurrencywatch.com
Tags: bond, bonds, capital gains, currencies, Currency, currency pairs, currency strength, dollar, euro, Forex, Forex Market, forex trade, Forex Trader, interest, invest, Investing, investor, investors, japan, japanese yen, money, pairs, swiss franc, Trading, Trading Currencies, yenPosted in
